It is currently believed that the United States spends more on healthcare than any other nation in the world both on a per capita basis and as a portion of gross domestic product. Over time, healthcare costs in the United States have increased 10-12% per year. It is estimated that the annual cost of healthcare in the United States will exceed $4 trillion in 2016. Although recent Healthcare Reform legislation makes significant progress in terms of access and fairness in the insurance marketplace, there is continuing concern that the fundamental causes of rising costs have not been addressed.
A large percentage of the population of the United States pays for healthcare costs through health insurance obtained through their employer. For many small business owners, though, the cost of health insurance is a major concern. Many small to medium sized businesses find that they have had to limit employee healthcare options because of high costs and that it is difficult to maintain previous levels of coverage for employees.
At the same time, many physicians and health organizations are concerned about the high percentage of total healthcare costs in the United States that are directly associated with behavior-based illnesses and conditions. The need for incentives, guidance, and support for lifestyle changes that are required in order to alleviate both the suffering and expense of a variety of self-imposed medical problems is being effectively addressed in many instances by employer-based “Wellness Programs.” The more substantive Wellness Programs are generating measurable positive impacts both in terms of clinical measurements and in terms of reduced per capita health insurance claims within the groups that sponsor them. One distinction evident among the various Wellness Programs and their methods is that scheduled individual coaching on a live, person-to-person basis generates significantly better results than other less personal or more passive formats. Such robust programs, while they may generate substantial returns on investment, have a significant cost component. Furthermore, while the claim reducing impact of Wellness Programs is definite and measurable, the appearance of results in terms of claim cost reduction require time (often several years) before they begin to be realized.
This expense factor, in the context of standard health insurance models, creates a very serious obstacle in terms of wellness and health management initiatives for mid-market sized companies (e.g., 50-750 employees). As they struggle year after year to deal with rising health plan costs, they generally cannot or will not take on significant additional health plan expense (e.g., Wellness Program overhead) unless it will predictably lead to some positive financial result without assuming undue financial risk.
In the current art, there are essentially two types of healthcare plans (i.e., fully-insured plans and self-funded plans) available to these companies. Fully-insured healthcare plans include an arrangement in which an employer pays a premium calculated to represent the entire cost of providing coverage for its members and an insurance company bears the financial risk of providing that coverage for the members of that group. Self-funded healthcare plans include an arrangement in which a group (e.g., an employer) directly pays the cost of coverage for its members, subject to financial limits established with “stop loss” coverage. Because of the financial risk of self-funded plans, a group may wish to reduce its risk by purchasing “stop loss” insurance from a stop loss insurance carrier. Stop loss coverage creates a maximum limit on the financial liability of the group and therefore protects the group from excessive claim costs both in the circumstance of high claims for a single covered individual (i.e., “specific stop loss”) as well as that of high claim totals for the entire group (i.e., “aggregate stop loss” or “ASL”). The group (e.g., employer) remains liable for paying medical claims up to a certain level at which the stop loss carrier takes over the payments.
However, neither fully-insured plans nor self-funded plans can deliver both the protection and financial incentive necessary to adequately reward plans that incorporate Wellness Programs. Fully-insured plans cannot do so due to their inability to timely and appropriately reward lower claims. Conventional self-funded plans cannot do so due to the unacceptable level of financial risk that they generate.
FIG. 1 is a block diagram showing a conventional stop loss insurance arrangement 10. As shown, the conventional stop loss insurance arrangement 10 comprises a client group 12, an optional third party administrator 14, and a stop loss carrier 16. The arrangement 10 may further comprise simple computer-based communication and information interfaces between the entities. The client group 12 (e.g., company, organization, etc.) may obtain stop loss insurance directly from the stop loss carrier 16 or may utilize the services of the third party administrator 14 to obtain stop loss insurance. The third party administrator 14 may also manage the exchange of funds between the client group 12 and the stop loss carrier 16. The third party administrator 14 may receive premiums from the client group 12 to pay the stop loss carrier 16 for stop loss insurance coverage. The stop loss insurance arrangement 10 requires the client group 12 to pay for medical expenses up to a predetermined level (e.g., 125% of an actuarially determined expected amount). Any expenses over the predetermined level are paid by the stop loss carrier 16.
The conventional stop loss insurance arrangement 10 may include self-funding risk management having self-funded liability for the client group 12 and additional liability transferred to the stop loss carrier 16. In this arrangement, populated by only two risk-bearing entities (i.e., the client group 12 and the stop loss carrier 16), the electronic records, formulas and financial transfers are organized around an actuarial assessment of expected claims. Typically, this assessment of expected claims is then multiplied by a factor of 125%. The expected risk represents a combination of both less-frequent large expenses and more-frequent small expenses. Medical claims below 125% of the expected level of expense is the liability of the client group 12 and the risk above this threshold is the liability of the stop loss carrier 16.
FIG. 2 is a graph showing the financial risk distribution for the conventional stop loss insurance arrangement 10 of FIG. 1. Medical claims are paid by the two separate entities according to the different layers of financial responsibility or liability. As shown, claim totals that are equal to or below 125% of the expected level of expenses are the liability of the client group 12. Therefore, the client group 12 under this arrangement pays up to a set threshold level (e.g., 125% of the expected level). Medical claims that exceed the threshold level are the liability of the stop loss carrier 16.
Under the conventional stop loss insurance arrangement 10, the client group 12 (e.g., employer) agrees to pay for the claims incurred by the plan's members directly through the third party administrator 14. The casualty insurance, or stop loss coverage, provides an overall cap on a monthly basis for the aggregate total of the claims that the client group 12 will be responsible for funding. The maximum funding liability is called the “Attachment Point” and is calculated as the aggregate cumulative total of “Attachment Factors” (monthly claim maximums set on a per employee basis) issued by the stop loss carrier 16 each year as representative of the level of risk it will accept. Specific stop loss is the other standard insurance component of self-funded plans and is a form of casualty insurance which limits the expenses for which the employer is liable on an individual basis. This provides a high individual “deductible” (often $25,000 to $150,000) on each member of the plan above which the employer is not responsible to fund claims.
In general, an issue with stop loss coverage, which essentially results in deterrence to adoption of a self-funded plan, is that the level of protection that stop-loss carriers 16 are willing to provide for ASL is generally at a substantial factor above actuarially expected claims, most often at 125% of the expected total. This means that, while a successful claims year could yield total plan costs significantly lower than a conventional fully insured plan (which includes a cost factor, generally in the range of 100% to 105% of expected claims, in the premium), an unsuccessful year could result in much higher costs. For example, faced with a 12% fully insured renewal premium increase, a “mid-market” company might avoid the increase or even reduce their current costs over the next 12 months with a successful claim year under a self-funded plan. On the other hand, if the company had a year with a high claims volume, it could spend 15% to 20% more than the renewal increase. This “toss-up” type parity between the potential for savings and the potential for cost increases, combined with the inherent statistical volatility of the group size of mid-market companies, prevents the large majority of them from utilizing the self-funded approach, with or without the benefit of wellness and healthcare management programs.
Even though the claim reducing impact of effective wellness and healthcare management programs is definite and measurable, results do require time and certain types of claims, such as trauma or various chronic illnesses, are not susceptible to even the best wellness programs. With these persistent claim risk factors and the prospect of even higher costs in the worst case scenario of standard self-funded plan design, the large majority of mid-market companies decline on both fronts: they do not participate in proactive support of wellness with healthcare management nor do they participate in the self-funded arrangements that would enable them to benefit financially from wellness initiatives.